9/28/2011 @ 6:00PM

THE REAL THING?

Investor Gabriel Schulze–tall, blue-eyed, American–walked into the conference room at the Yanggakdo International Hotel for his business meeting with the North Koreans. A towering edifice separated from the rest of Pyongyang by a ring of water, the Yanggakdo has an air of secrecy appropriate to the moment: Schulze was here, on only his own authority, to bring Coca-Cola to the Democratic People’s Republic of Korea.

“We warmly welcome you, the Coca-Cola delegation, with Mr. Schulze as your leader,” said Park Chol Su, the president of North Korea’s Taepung International Investment Group. “I hope this will be a good opportunity to make progress in the relations between the U.S. and Korea.”

Why is an American businessman in Pyongyang pitching America’s most famous soft drink to the world’s most inhospitable and politically incorrect marketplace? Because, surprisingly, North Korea is ready to buy. Eager even, eager enough to let the world know, allowing a reporter to sit in on its Coca-Cola discussions with Schulze in Pyongyang, recording everything. Park says his Taepung Group, established by Kim Jong Il himself, wants to bring market principles to a planned economy, even down to setting the price of a bottle of Coke, sort of.

“Costs are based on the demands of the market, but we will respect your price,” Park told Schulze’s delegation. “If the price is too high, it will be restricted.”

North Korea, the most hidebound of socialist states, is inviting not only China but also the wider Western World to invest in its near moribund economy. Officials there claim the country is open for business with outsiders; the political stripes of the investors do not matter as much as the money in their pockets and the willingness to deal.

American signature brands may actually be most welcome, despite or perhaps precisely because of decades of propaganda casting the U.S. as the evil archenemy. Pyongyang’s economic representatives made clear in this and other meetings, with focus and determination, that they also want KFC to open stores.

Their push is supposed to begin a planned ten-year revamp of the North Korean economy that seeks to expand national GDP from a meager $30 billion last year to $1 trillion by 2020. That seemingly impossible goal cannot even be approached without an unshackling of enterprise, which may never occur, and massive help from the outside world, which may never come. The expression “reform and opening,” so familiar in China, is not yet politically acceptable language in Pyongyang. Nevertheless, North Korea’s courtship of the West has begun.

“Coke is strategic. I hope that Coke will serve as a bridge for relations between the two governments,” Park told Schulze’s group, with FORBES ASIA along, over a traditional Korean hot pot lunch and beer. Then, perhaps, sanctions could be lifted, and more substantial investments could follow. “The door will be open to the whole world, not only China–even the U.S., even Western countries.”

But is the Western World ready to do business in North Korea, perennially the most roguish of rogue states? Politically the country is still in the totalitarian grip of Kim Jong Il. The regime is a defiant nuclear provocateur accused by the West of proliferating weapons, drugs and counterfeit cash abroad, while operating a terrifyingly effective police state at home. Western companies will require more than the usual amount of persuasion. They will want something that the North Koreans can’t provide and that may be impossible to get in a presidential election season: a blessing from the White House.

The man on the unlikely quest to secure that blessing is Gabriel Schulze, scion of the Newmont Mining family, with a prospector’s taste for risk and opportunity. He has been surveying this forbidden market on the strength of informal connections to Coke and one of its bottlers, SABMiller, but without either company’s top-level approval.

SABMiller sent a regional executive at Schulze’s invitation to the May meeting with Taepung Group, saying in a statement for this article, “however, we have no plans to invest in North Korea.” Coke turned down a request from Taepung Group (via Schulze) to visit this summer, and distanced itself from the remotest hint of soft-drink summitry in Pyongyang with this statement to FORBES ASIA: “No representative of the Coca-Cola Co. has been in discussions or explored opening up business in North Korea.”

Coke’s skittishness is striking from a company with a history of selling into almost any market–including the inhospitable or unpopular, from Hitler’s Germany in the 1930s to Franco’s Spain to Pyongyang’s historical sponsors, China and the Soviet Union, in the 1980s (though Pepsi got to the Soviet Union first). North Korea is one of the last frontiers.

“That is your task, to become a pioneer,” said Jang Gwang Ho, the senior North Korean official in the coterie greeting Schulze’s group.

If Schulze is to be an unlikely American pioneer in Pyongyang, he at least looks and acts the part. Every bit the All-American–devout Christian, with a Chamber of Commerce approach–he towers above his North Korean counterparts at 6 foot 7. The great-great-grandson of Newmont founder William Boyce Thompson, he runs a family investment office out of Beijing, Schulze Global Investments, which specializes in China and difficult emerging markets.

Schulze has close ties to Republicans in U.S. politics, but his gambles abroad, such as a cement plant in Ethiopia, are far from conservative. Schulze Global seeks “double bottom-line returns,” Schulze says, profiting while helping poor emerging markets develop. Bringing Coke to North Korea would be historic, but he knows his desire to engage with Pyongyang might be seen as a folly back home, both financially and politically.

“We understand that there’s a high likelihood that there could be all sorts of trouble and that we could end up losing money,” Schulze says in an interview after his trip. “There’s a lot of [U.S.-North Korea] mistrust, there’s a lot of gamesmanship, and for us it’s not about pretending that that’s not there. We’re not in a little bubble of happiness.”

Would it even be legal for Coca-Cola to do business in North Korea, given the presence of international and U.S. sanctions? Those sanctions have proven to be narrow and permissive in practice, and there is no stricture against soft drinks (a sip of Coca-Cola is already imported, mostly from China, and sold to the few with disposable hard currency).

Hundreds of foreign businesses, most of them Chinese, have come into North Korea despite cautionary tales of investments gone awry, of North Korean officials changing the terms or the rules, soliciting bribes, demanding substantially higher payments or expropriating joint ventures.

And these businesses have made money. In a 2007 survey of 250 Chinese businesses operating in North Korea, scholars Stephan Haggard and Marcus Noland found 88% saying they could turn profits. (A majority also reported paying bribes.) Enterprises routinely encounter difficulties, yet many persist, hopeful for economic liberalization.

At least one American investor has profited in North Korea as well: Schulze Global. Three times in 2008 it made loans of hundreds of thousands of dollars to mining companies to buy equipment and expand, and each was repaid. This summer Schulze lent an additional $1 million to finance a North Korean conglomerate’s purchases of corn to feed its workers. (He consulted with sanctions lawyers in the U.S. before making the loans and has filed notices with the U.S. Treasury Department.)

“That opened the doors,” Schulze says, to the Coke project. Making the world’s favorite carbonated beverage in Pyongyang would be quite another matter, though. The country still operates on a planned economy and has difficulty even manufacturing plastic bottles and cans. The government barters for sugar from Castro’s Cuba and would probably have to import steel to build a Coke factory. And although the estimated per capita income is $1,200 a year, the Coke factory’s workers would be paid barely more than a dollar a day (low wages are a key selling point to foreign investors). Further, the nation is plagued with persistent food shortages that force the regime to rely on international aid. Does a country this poor have consumers for the iconic American drink?

The answer, actually, appears to be yes, at least in the capital: Home to the privileged upper crust, or an eighth of the nation’s 24 million people, Pyongyang has a visibly robust elite economy. The city’s wide Stalinist thoroughfares, bereft of private automobiles five years ago, are now filled with tens of thousands of foreign cars, including American and Japanese brands.

Mobile phone use is common, with more than 300,000 accounts in the capital using the 3G network built by Egyptian telecom Orascom. That includes some of the city’s traffic women, famous for their white gloves and powder-blue uniforms: With traffic lights now doing most of their work for them, one was spotted on the sidewalk jabbering into her cellphone.

The city’s new Pothonggang Department Store, visited by Schulze’s group, was fully stocked with imported fare to be had at prices in North Korean won that are only affordable at the black-market exchange rate (2,500 won to the dollar at the time, compared with the official rate of 100 won). Name brands like Heinz Ketchup (the equivalent of $4 a bottle), Mars bars (a little more than $4) and all manner of high-end liquors and cigarettes were on offer, usually imported from Europe or Asia. On another floor were imported sweaters, dresses and shoes.

The checkout lines ran briskly in midafternoon, the shopping done mostly by women, many of them likely the wives of government officials and army officers. (Kim Jong Il showcased the store with a visit in December.) Out on the streets, the proles shop for snacks and locally made sodas–typically fruity concoctions in glass bottles–at hundreds of kiosks throughout the city, mostly priced at 20 cents to 40 cents at the black-market rate.

Those prices would be 25 times higher at government exchange rates and thus out of reach for almost all North Koreans on their official salaries–but hard currency is flowing into the capital, “through this and that channel,” Jang says, and is spent. “Although officially they are not receiving the salaries from the government in hard currency, they have! So they like to spend the hard currency for their children because the children like to drink the Coke,” he explains. “Even myself! I don’t like to drink wine, and I don’t like alcohol. I like soft drinks. I will spend the money for that.”

Jang, of course, is not a commoner or for that matter a typical North Korean apparatchik. He speaks fluent though idiosyncratic English, was educated partly in the U.K. and is married to a doctor. First vice president of Taepung Group, he has a dual appointment on a government body overseeing economic development. The president of Taepung, Park, is a Chinese national, chosen in part for his Chinese contacts and experience.

Over two days of meetings (and, to Jang’s chagrin, boozy meals) Jang exuded an almost relaxed air of detachment. He typically parried questions with humor and stories while puffing on Dunhill cigarettes and flashing a Longines watch.

Do North Koreans like to drink beer? asked Anton van Heerden, a South African who runs SABMiller’s Asian supply chain. Yes, especially a growing cadre of retirees. “I can see so many old men, over 60, normally in the evening if we look around the city, they are making a queue to buy the beer,” Jang said, adding with a chuckle: “There are crazy people! A lot of people drink the beer–30 bottles in the evening! I don’t know how.”

Asked how much beer costs, two stuffier men in dark suits, both ranking officials at the Ministry of Foodstuff & Daily Necessities Industry, suggested the equivalent of $1.50 a pint, which Van Heerden called “too expensive.” Jang bluntly contradicted them, speaking freely in English, knowing that his colleagues wouldn’t understand: “No, forget about it; that’s the hotel price. These guys, they never go to the street, the beer shops, so they don’t know the price, but I think it’s much lower than” 30 cents a pint, he said. “Depends on the quality. Normal people, they drink the normal beer.”

Jang and Park are the men Schulze shakes hands with in Pyongyang and in meetings in Beijing, but they both make clear that they answer to a higher power: the leader they refer to only as “the top man,” “the General” or the “Dear Leader,” Kim Jong Il. Park was born to Korean parents in northeastern China in 1959, as Kim Il Sung’s regime recovered from the Korean War. Slight of stature, with a toothy smile and a taste for liquor, Park built relationships with North Korean officials by selling them much-needed gasoline in the 1990s. He is a salesman again now, puffing up his chest as he blusters about the will of “the General” to change North Korea’s economy, led by his Taepung Group.

Park says he has never met “the top man” and instead takes his instructions from a close Kim confidant, 73-year-old Kim Yang Gon, who is chief of the United Front Department, an intelligence arm of the Korean Workers’ Party, and chairman of the Taepung Group. Still greater power at Taepung likely lies with another member of the board of directors, Kim Jong Il’s brother-in-law Jang Song Taek, who as vice chairman of the National Defense Commission is considered North Korea’s second-most-powerful man. The National Defense Commission, chaired by Kim Jong Il, is also Taepung’s controlling shareholder.

To some Western analysts of the regime, the Kim circle’s tight control of Taepung means the group is not an agent of change and reform but precisely the opposite, a vehicle for Kim’s inner circle to tighten its grip over the North Korean economy; Kim wants Taepung to bring in multibillion-dollar deals for resources, power plants, ports and roads, they say, so that Kim and his crowd can control the spoils.

Schulze recognizes this criticism but notes that a Coca-Cola investment would be far more symbolic than it would be lucrative. The total investment might not exceed $10 million (with Schulze Global’s share at $2 million)–tiny by comparison with some resource deals. He also argues the only realistic way to engage with North Korea is precisely through those currently in power.

“People say this is the leadership looking to benefit itself, and I would say yes, that is absolutely true. If you look at any economic reform and opening it’s about trying to create a kind of economy that allows the current leadership to stay in place,” Schulze said. “It doesn’t negate the fact that selfish ambition can still drive positive change and development, particularly in the economy, which can make a real difference in the lives of North Koreans.”

His groundwork laid in North Korea, Schulze will continue to lobby not only Coke but also Capitol Hill and the Obama Administration. He is, in a way, following in the footsteps of his great-great-grandfather, Thompson, the mining magnate. Thompson shocked his friends in the business establishment when, after returning from Russia after a trip in the fall of 1917, he urged that the U.S. and Britain engage with the new Communist regime there to moderate the impulses of Lenin and Trotsky.

“The Bolsheviki, he was sure, would remain in power,” reports a biography of Thompson, The Magnate. “If they were recognized and trade were established, Russia would be kept within the bounds of commercial custom. But if they leave Russian radicalism to grow like a cancer,’ he said, it is going to be a menace to the world.’”